Bundesbank to reject Irish bonds

Bank bonds guaranteed by the Government will no longer be accepted as collateral by Germany’s Central Bank — in a move which is certain to make it harder for the National Treasury Management Agency to re-enter bond markets.

The European Central Bank gave all of the eurozone’s 17 national central banks permission not to accept bank bonds underwritten by governments in EU/IMF bailout programmes — Ireland, Portugal and Greece — as collateral to get unlimited ultra-cheap loans.

The Deutsche Bundesbank has confirmed it is the first European central bank to avail of the change of rules starting with €500m already on its balance sheet, a spokeswoman said.

A NTMA spokesman said they would not be commenting on the unilateral move by the Bundesbank.

The rejection of Irish and other bonds could take up to a month to come into force, according to a Bundesbank spokeswoman as the Bundesbank is obliged to give notice to its business partner banks of the changes in “terms and conditions”.

The move to allow central banks reject Irish, Greek and Portuguese bonds was seen as a thinly-veiled attempt to soothe the concerns of Germany’s Bundesbank that the ECB has made it too easy for banks to access its funding and exposed the national central banks to too much risk.

“National central banks are not obliged to accept as collateral for Eurosystem credit operations eligible bank bonds guaranteed by a member state under an EU-IMF financial assistance programme,” the ECB said in a statement.

Reuters reports the ECB has for some time accepted bonds which are issued by bailed-out banks but which also carry government guarantees, a change it made to prevent banks in struggling countries such as Greece, Ireland and Portugal from going under.

At the end of last year and early this year, it further loosened the rules on what banks are allowed to swap for funding loans to include a wider range of assets and also gave national central banks a greater say in what they took.

The move helped bump up the amount banks took in, in the two offerings of ultra-cheap three-year funding which combined saw it pump over a trillion euro into the financial system.

Former top ECB policymaker Juergen Stark recently described the quality of some of the collateral now accepted as “shocking”, while current Bundesbank head Jens Weidmann wrote a letter to ECB president Mario Draghi last month raising his own concerns and urging him to reverse the recent changes.

— additional reporting Reuters